Japan’s leadership election – reset not revolution
Japan’s Liberal Democratic Party (LDP) has chosen Sanae Takaichi as its new leader in a run-off victory over the more moderate Shinjiro Koizumi. The October 4 vote primarily channelled voter frustration with ‘politics as usual’.
However, Japan’s first female prime minister – who is likely to be officially confirmed in this role once the Diet votes around October 14-15 – will be constrained by coalition math and LDP party elders.
A step to the right – but not a swerve to the extreme.
Takaichi’s win was powered by grassroots momentum and late, decisive lawmaker support. She inherits a governing ‑LDP–Komeito bloc that is in the minority in both the Lower and Upper House and will therefore need either a formal pact with the Japan Innovation Party (Ishin) or issue-by‑-issue deals (e.g., with the Democratic Party for the People (DPFP)) to pass legislation.
Japan repeats a global pattern.
As we noted regarding July’s Upper House election, this result fits into a wider anti-incumbency wave that is sweeping developed democracies – first and foremost the United States. However, Japan’s ruling party has once again absorbed protest internally rather than conceding power – evidence, despite all the criticism, of the LDP’s continued breadth and political agility.
The mandate – and its limits:
Takaichi’s ascent reflects – and depended on -- establishment backing, especially by Taro Aso, whose network is closely aligned with the Ministry of Finance (MOF). This matters: while she has called for a return to ‘Abenomics’-‑style activism, MOF red lines (and coalition partner Komeito’s caution) will discipline her regarding any increase in Japan’s public deficit and temper any push for ultra-low interest‑rates.
Notably, she already stepped back from a consumption tax cut during the race and targeted relief is more likely than sweeping tax cuts.
Coalition is the strategy – consensus is the method.
Because the LDP lacks a Lower House majority, partners and allies will have the ability to impose ‑checks and balances:
Komeito will push for social welfare‑ pragmatism and moderation.
Ishin (if added) would press for administrative reform and fiscal restraint.
The DPFP can cooperate regarding specific cost-of-living items.
If Takaichi manages to stitch together a durable arrangement, then Japan may get a right-leaning yet balanced government that could prove more stable than markets currently assume. With roughly three years to go before a general election is required, a leader aiming for durability has every incentive to dial down gratuitous provocations, especially with regional neighbors in Asia.
Yesterday’s rival, today’s partner
Caricatures of Takaichi as “hawk, full stop” miss an underrated ability to compromise, which matters in a coalition era. Based on a first-hand account I took from a politician who once ran directly against her , Takaichi reached out after the contest to say, in essence, “the election is the election - now let’s work together for society and people,” and those cross-party channels have remained active.
This aligns with a broader pattern of coalition‑pragmatic behavior: like her predecessor Shigeru Ishiba, Takaichi spent time outside the LDP earlier in her career, and she has kept channels open including with figures such as Yoshihiko Noda, now leading the main opposition. In a split Diet, “yesterday’s rival can become today’s partner” is not just a slogan; it is a method for assembling votes and lowering the political temperature.
Déjàvu‑2012 – but in a split Diet
The current situation carries an echo of December 2012, when Shinzo Abe turned public discontent into a governing project. Takaichi consciously brands herself as Abe’s heir - on security, economic activism and party discipline. Voters want relief from inflation and drift; she must now turn that mood into tangible gains – and has an opportunity to do so – but without having single-party dominance in parliament‑. Coalition math will, therefore, govern the tempo.
Macro & markets: big rhetoric, targeted reality
Fiscal stance.
Expect a supplementary budget with targeted relief for households, focusing on energy and food costs, alongside productivity-linked incentives for SMEs and capital spending. A broad consumption tax cut is unlikely. With Japan’s debt/GDP ratio at around 250%, stimulus measures will be based on fiscal reality despite the ‑slogans.BOJ choreography.
Takaichi has criticized premature hikes before, but the BoJ meets later of this month on its own timetable. Any friction will surface in guidance and cadence, not in sudden pivots. Base case: gradual normalization with careful political choreography.Deals.
Selective inbound M&A will continue but may face tight economic‑security reviews, while outbound moves are likely to skew toward de‑risking acquisitions/JVs - so build in time, data‑governance and remedy planning up front.
Foreign & security: three quiet years (if she wants them)
Takaichi’s public stance is best described as security‑first, values‑driven and tradition‑aware, with clear continuity on the US alliance, the path for defense spending to reach 2% of GDP, and tighter tech‑security coordination.
That said, Japanese boardrooms with deep China exposure are signaling a preference for stability; expect a cautious, measured operational posture toward Beijing and Seoul even if the rhetoric occasionally runs firmer - especially while coalition partners prioritize domestic delivery and growth. Put simply: headlines may harden, but execution is likely to be disciplined.
Conclusion: Thatcher’s endurance rather than a Truss shock
Takaichi openly cites Margaret Thatcher as a role model. Yet the markets are concerned that she may deliver Japan’s version of a Liz Truss ‘shock’ by pushing for too much public spending too quickly and spooking the bond markets. We see that unlikely given the influence of Taro Aso and the MOF and the fact that she will be beholden to the LDP’s coalition partners to build working majorities in the Diet.
These guardrails augur for Takaichi proposing only limited short-term tax cuts and budgetary stimulus and instead patiently building credibility. She says she admires Thatcher’s famous political discipline and now can put it into practice.
The view from outside Japan
William Klein
Takaichi’s calls for further reforms of the constitutional provisions that limit an expansion of Japan’s military will generate praise in Washington and concern in Beijing. She has said that Japan’s defense alliance with the US is her top foreign policy priority, and she has promised to uphold the trade and investment deals that her predecessor struck with the Trump Administration. Her ability to engage President Trump and address his calls for greater Japanese military spending and economic concessions will be put to the test during their expected meeting around the APEC summit in November.
Her rise has also elicited apprehension from China largely because of her nationalist views, as exemplified by her regular visits to Tokyo’s Yasukuni Shrine, which China views as a symbol of an aggressive Japan militarism in World War II. Takaichi’s visit to Taiwan earlier this year and her call for a “quasi-alliance” between Japan, Taiwan, India, and other democracies has further exacerbated Beijing’s distrust, although she recently sent a conciliatory message to Beijing by describing China as an “important neighbor.” Headlines highlighting Sino-Japanese frictions will likely be common during her reign as prime minister, even as the two sides try to contain their differences via diplomacy.
Similar narratives can be expected with respect to Japan’s relations with South Korea due to Takaichi’s views on the fraught history between the two countries. She has, however, called for stronger trilateral military cooperation between Japan, the United States and South Korea.
Under her leadership, Japan can be expected to remain in the mainstream of G7 views and take a prominent role on issues related to the Indo-Pacific region. She has signaled continuity in Japan’s relationship with the European Union, pledging to support the trade and partnership agreements struck by her predecessor with Brussels earlier this year.
